Following a chat with a friend this weekend, I realised that I don’t have a single post on here which actually talks about the basics of FIRE. To be fair I’m quite like this in real life as well – just starting sentences wherever I had reached in my own head and assuming everyone else was there with me. As my mum once said, “it’s like your train of thought is half way out of the station and off down the track before I realised you were speaking to me”. But as with saving (see what I did there?!) it’s never too late to start a new habit, so in these next two posts I am going to outline some of the basics.
So, what is FIRE?
There is a whole movement out there, so I start with the caveat that this is my personal take. Financial Independence, Retire Early (or FIRE) is all about becoming financially free from the need to do things you don’t want to. This includes spending money on things you don’t really want or need; and for most people, means being free to give up paid employment. There are different kinds of FIRE to aim for, which relate to the extent of your freedom and whether you need an income at all, and a few main steps.
Where do I sign up?!
The brilliant thing about FIRE is you can start from wherever you are. All the steps are simple to work out (or there are simple versions at least).
Step One: Start with your ‘why’. This is so important, but it could be anything. You hate your job; you want to spend more time with your kids; you have an amazing idea for a world changing small business but you can’t get started with the debts and commitments you have; your dad died before he could retire and you don’t want that to be you. FIRE is simple but it’s not always easy – having a ‘why’ to come back to really matters. And it might change which is totally fine. My why is about being able to live my dream life, with my kids, and a balance of the work, environment, community and service that means to me.
Step Two: Focus first on financial stability. I don’t talk much about this here because it’s not where I am at on my journey, but getting out of debt, and making the lifestyle changes needed to ensure that you are self-funding, is the first building block. Dave Ramsey is a good place to start, with a plan designed around simple steps.
Step Three: Work out what you need. There are some basic tips on how to do this which centre around two rules: the 25% rule for calculating how much you will need, and the 4% rule for calculating how much you can take out in retirement. You only need to do one sum, though the first part takes a bit of work. You need to work out how much you will need to live off in retirement (whether that’s at 65 or ASAP). This will be different for everyone, with two big factors being whether you have children or family members to support: and your accommodation costs.
Do a rough calculation of your monthly fixed essentials – utilities, transport, accommodation and so on, remembering to factor in giving up work so whilst your commuting costs might go down, your energy bill might go up. To be fair, you could probably use your in-COVID costs for this.
Estimate what are essential but not fixed, so groceries, charitable giving, entertainment. People have these in different categories, but I work to a ‘basics’ budget which includes e.g. good internet and some money for books, movies and whatnot but not much.
Get real about what you want out of your retirement. If you want to spend it all on cruises around the Caribbean, your costs will be very different to someone who wants to potter about at home and spend some time each year visiting family in the same country. There are also lots of different kinds of FIRE, some of which aim to cover all the basic costs but assume some additional income stream to cover luxuries – for now though, just start somewhere.
An easy way to just get going is to take an estimate. WHICH did some great research into what people in the UK actually spend in retirement, and found it was less then most people imagined. They have calculations for a basic, comfortable and luxury retirement, finding that a luxurious retirement for individuals (not couples who are calculated differently) costs £30,000 per year, but this is dependent on having a paid-for house.
Once you have these total costs, multiply them by 25. I worked out that I will need £30,000 – so I should need £750,000 invested.
Step Four: calculate your net worth. Whilst it can be disheartening to feel like you need to save an unfeasibly large amount of money, hopefully, you won’t be starting from zero. Working out your net worth can take a little while the first time you do it, but recalculating it annually is easy peasy. You essentially need to work out your assets: capital on your home, cash in the bank, money invested in pensions or non-retirement funds, premium bonds, money down the back of the sofa – all of it. This might take some digging, but make those calls to find out where your old pension fund went, it’s your money after all! Then work out your debts (mortgage, student loans, other debt) and minus this from your assets. Voila! Net worth. I share my net worth annually.
Once you know your net worth you can also revisit the figure that you are aiming for since there might be other things to take into account. For example, since I have two small defined benefit pensions which will are already projected to bring in £9,000 per year in retirement that means I actually need £21,000 more, or £525,000 saved and invested. If I add in the state pension (which frankly feels like magical thinking the way things are going, so I don’t count it – if I was closer to retirement then I would do) then I would have an additional £8,970 per year and only need to save £300,000. My calculations are also based on owning a home outright though, which is a massive additional aspect in terms of either saving enough to pay it off between now and retirement, or needing a lot more invested to cover your costs.
And that’s steps one through four! Realistically if you are in a lot of debt, then these steps will take a while. But if you are an average person with a reasonable income, puttering along and thinking about how to get more out of life, you might have just moved into a whole new frame of mind. A quick moment to recognise that these are really hard times, and with the average British person being more in debt since COVID than ever before, this might all feel impossible. But I really believe that the tenets of the FIRE movement, some of the thinking and the simple actions to make a difference, are valuable wherever you are in your journey. More on all of these, and steps five through seven next week.
PS: If you want to find out about FIRE and get all fired up yourself, Mr Money Moustache’s ‘start here’ post is a great one. MMM is the hipster uncle of the movement (which also has grandparents, coming to that another day) and is all kinds of inspiring, though one of the reasons I started this blog was that, whilst I love his writing, he doesn’t resonate with me much.